Dominating the Streaming Media Player (SMP) Market
The February stock of the month is Roku, Inc. (NASDAQ: ROKU). Roku is the leader in streaming media players (SMP), with a market share of 39%, according to Parks Associates. Amazon (NASDAQ: AMZN) is #2 with a 30% market share. Together, Roku and Amazon have a duopoly on the SMP market.
Roku’s mission is “to power every TV in the world.” (source: Roku investor relations).
In the Q3 2019 Shareholder letter, Roku estimated that 50% of U.S. cord-cutters are Roku customers. In the Q3 earnings call, Roku announced:
- Strong platform growth of 79%
- The platform is now 2/3 of total revenues
- Launched Kids & Family on The Roku Channel (TRC)
- Will be focusing on international markets
More than one-third of all smart TVs (or connected TVs) in the U.S. are Roku TVs, according to Roku’s Q2 2019 Shareholder letter.
On November 8, 2019, Roku completed its acquisition of dataxu, which I believe will fortify its already strong ad platform.
Roku’s shares closed at $124.25 on February 7, 2020. I think this is a reasonable price for the stock and I plan to hold for the long-run.
Invest in What You Know and Like
If you’ve been following my articles for a while, you know that my #1 rule is to Invest in What You Know and Like. Roku is a product that I know very well. I’ve known of Roku even several years before the company’s 2017 IPO. About 10 years ago, I bought my first “smart TV”, a Sony (NYSE: SNE) Bravia. I was excited to get connected to some really cool apps. However, the experience was underwhelming. And so I spent most of my TV time on my Comcast (NASDAQ: CMCSA) DVR box. More to come on the DVR’s connection to Roku’s founder and CEO later.
It was around this time that my wife and I had just started dating. She was using this little device called a Roku that plugged into her TV and transformed it into a “smart TV”. We spent many hours streaming Netflix on this little Roku. I was amazed at how much smarter this device was than my expensive smart TV. Everything about it was great, from the easy-to-use remote control to the responsiveness of the apps. I was in cord-cutter heaven.
When Roku’s IPO debuted in 2017, I was hesitant at first. A few years before, I had correctly predicted the declines of both the stocks of GoPro (NASDAQ: GPRO) and Fitbit (NYSE: FIT). Being a device company, my knee-jerk reaction was to place Roku in the same category of both those stocks.
However, I read some articles which stated that Roku was transforming itself from a device company to a “platform” company. Platform meant that they would generate more money from things like selling ads and revenue sharing with content providers. This meant higher margins and that their company should be compared with Facebook (NASDAQ: FB) or Alphabet, the parent company of Google (NASDAQ: GOOGL) instead of GoPro or Fitbit.
Roku’s S1 stated, “In the six months ended June 30, 2017, player revenue represented 59% of total revenue and declined 2%, and platform revenue represented 41% of total revenue and grew 91% from the six months ended July 2, 2016.”
I was convinced that Roku’s platform strategy would work, so I bought shares in the $30 to $40 range in November 2017 and again in March 2018. Roku’s closing price this past Friday was $124.25, so I’ve got a 3-bagger so far.
Even after its huge increases, I’m still bullish on Roku for the long-term.
Back in 2017, when the company said that it was going to become a platform company, they delivered on their promise. Now they’ve just completed their acquisition of dataxu. Dataxu should make Roku an even stronger player in selling ads. They also have grand ambitions to expand their global reach into countries like Brazil and the U.K.
Given their history of strong performance, I have a high amount of confidence in the company’s leadership to execute on its strategy and goals.
Roku’s primary competitor is Amazon’s Fire TV Stick. As I mentioned earlier, both of these companies have 70% of the market. Roku is still in the lead, and I expect them to continue their dominance.
Anthony J. Wood is the founder, chairman, president and CEO of Roku. He was Vice President of Internet TV at Netflix (NASDAQ: NFLX). And remember the DVR. Mr. Wood invented it. He’s clearly a very smart leader. With Mr. Wood at the helm, I think that the company is in good hands.
The biggest risks I see in Roku are:
- Roku’s stock price may be too high
- The dataxu strategy may not be successful
- Amazon is a tough competitor
First, Roku’s price/sales ratio (P/S) is just over 15. This is considered expensive, even for a growth stock. Facebook’s P/S, for example, is just over 8. Any little hiccup could send Roku’s stock price tumbling.
Second, I’m betting that the dataxu acquisition will be successful based on management’s previous history of success. But if it ends up being a bust, the stock may sell-off and lower investor confidence in Roku’s leadership and execution.
And finally, Amazon is a close second to Roku in market share and is also aggressively pushing its Fire TV. As good as Roku is, you can never underestimate Amazon as a competitor.
Should I Buy?
Roku, Inc. could be a good addition to a portfolio that needs exposure to:
- The Communication Services Sector
- The Entertainment Industry
- Mid-Cap Growth Stocks
Be sure to do your own research and determine for yourself if Roku, Inc. is a good stock for your portfolio.
HOW MUCH SHOULD I BUY?
Here are some portfolio guidelines we Wolves try to live by:
- Thou shalt not hold more than 35% in any one particular sector
- Thou shalt not invest more than 10% of principal into 1 individual stock
- Thou shalt make small purchases. The general rule of thumb is to spend no more than 2% of your portfolio on a single purchase and build up your position over time.
The Bottom Line
Roku is the market leader in connected TVs. They already dominate the U.S. market and have plans to expand internationally. They also acquired dataxu, which could fortify their already strong ads platform. With a P/S of 15, their shares aren’t cheap, but their growth prospects and history of delivering results might justify the high valuation.
So what do you think about Roku, Inc.? Share this story on social media and leave a comment in the comment box.
I/we own shares of stock in ROKU, AMZN, SNE, FB, GOOGL, NFLX
Except for Wolves of Investing, I/we are not receiving any compensation from and do not have any business dealings with any companies whose stocks are discussed in this article.
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Donnie Nguyen is the founder and CEO of Wolves of Investing. He started investing in the stock market in the early 2000s. He follows the teachings of Peter Lynch, Warren Buffett, and other investing legends. When he's not investing or blogging, he loves spending time with his family traveling and experiencing the world.
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